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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules

EW 31: Base price adjustment formula

You could also call this:

“How to calculate your profit or loss when a financial agreement ends”

You calculate a base price adjustment when a financial arrangement ends. This calculation helps figure out if you’ve made money or lost money on the arrangement.

You do this calculation in the income year when the arrangement ends. The formula for the base price adjustment is: consideration - income + expenditure + amount remitted.

If the result is positive, it’s usually income you’ve earned. You might need to pay tax on this income. But if you spent money on the arrangement before and couldn’t claim it as a deduction, you won’t need to pay tax on that part.

If the result is negative, it’s an expense. You might be able to claim this as a deduction on your taxes.

The ‘consideration’ in the formula is all the money you’ve received or will receive, minus all the money you’ve paid or will pay for the arrangement. Some fees might not be counted in this.

‘Income’ includes money you’ve already earned from the arrangement in past years, dividends you got from not having to pay back a loan, and some other specific types of income.

‘Expenditure’ is money you’ve spent on the arrangement in past years.

‘Amount remitted’ is money you were supposed to pay but don’t have to anymore, either because the other person said you don’t have to or because of a law change. But it doesn’t include amounts you’ve decided not to pay yourself.

If other sections of the law apply, you might need to adjust these numbers before using them in the formula.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515304.

Topics:

Money and consumer rights > Taxes

EW 30: When calculation of base price adjustment not required, or

“When you don't need to calculate base price adjustments for financial arrangements”

EW 32: Consideration for agreement for sale and purchase (ASAP) of property or services, hire purchase agreement, specified option, or finance lease, or

“How to determine the value of property or services in various agreements”

Part E Timing and quantifying rules
Financial arrangements rules

EW 31Base price adjustment formula

A person calculates a base price adjustment using the formula in subsection (5).
The person calculates the base price adjustment for the income year in which section EW 29 applies to them.
A base price adjustment, if positive, is income, under section CC 3 (Financial arrangements), derived by the person in the income year for which the calculation is made. However, it is not income to the extent to which it arises from expenditure incurred by the person under the financial arrangement in earlier income years and for which a deduction was denied in those income years.
A base price adjustment, if negative, is expenditure incurred by the person in the income year for which the calculation is made. The person is allowed a deduction for the expenditure under sections DB 6 to DB 8 (which relate to deductions for interest) or, if none of those sections applies, under section DB 11 (Negative base price adjustment).
The formula is—
$consideration − income + expenditure + amount remitted.$

Where:
The items in the formula are defined in subsections (7) to (11).
Consideration is all consideration that has been paid, and all consideration that is or will be payable, to the person for or under the financial arrangement, minus all consideration that has been paid, and all consideration that is or will be payable, by the person for or under the financial arrangement. For the purposes of this subsection, the following are ignored:
non-contingent fees, if the relevant method is not the IFRS financial reporting method in section EW 15D:
non-integral fees, if the relevant method is—
1. the IFRS financial reporting method in section EW 15D:
2. the modified fair value method in section EW 15G.

If any of sections EW 32 to EW 48, or EZ 52D applies, the consideration referred to in subsection (7) is adjusted under the relevant section.
Income is—
income derived by the person under the financial arrangement in earlier income years; and
dividends derived by the person from the release of the obligation to repay the amount lent; and
income derived under section CF 2(2) and (3) (Remission of specified suspensory loans).

Expenditure is expenditure incurred by the person under the financial arrangement in earlier income years.
Amount remitted—
is an amount (a remission) that is not included in the consideration paid or payable to the person because it has been remitted—
1. by the person; or
2. by law; but
does not include a remission that is self-remission.

Compare

2004 No 35 s EW 31

Notes

Section EW 31(4): amended (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 34(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section EW 31(7): amended (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 140(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section EW 31(7): amended (with effect on 1 April 2008), on 6 October 2009, by section 147(1)(a) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section EW 31(7): amended (with effect on 1 April 2008), on 6 October 2009, by section 147(1)(b) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section EW 31(7): amended, on 1 April 2008, by section 379(1) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
Section EW 31(7)(a): substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 140(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section EW 31(7)(b): replaced, on 29 March 2018 (with effect on 1 April 2008), by section 80(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
Section EW 31(8): amended, on 26 September 2010, by section 41 of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
Section EW 31(9)(a): amended (with effect on 1 April 2008), on 6 October 2009, by section 147(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section EW 31(11): replaced (with effect on 1 April 2011 and applying for income years beginning on or after that date), on 30 March 2017, by section 73(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
Section EW 31 list of defined terms fair value method: inserted, on 29 March 2018 (with effect on 1 April 2008), by section 80(2) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
Section EW 31 list of defined terms IFRS: inserted, on 1 April 2008, by section 379(2) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
Section EW 31 list of defined terms non-integral fee: inserted, on 1 April 2008, by section 379(2) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
Section EW 31 list of defined terms self-remission: inserted (with effect on 1 April 2011), on 30 March 2017, by section 73(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).